Text | Qinghe Zhibenshe, title map: Visual China
The world is a bitter real estate, long time.
During the Great Depression, Old Roosevelt promulgated the “Home Loan Banking Law”, and real estate borrowed a visible hand to open the upper path.
For more than 70 years, real estate from the initial capitalization to the securitization after the 1970s, and then to the monetization in 2008, clearly outlined a trajectory of economic and financialization.
Today, real estate with financial attributes, land finance, credit currency, sweeping the economy into a debt bubble. The world economy has already entered the crazy phase of monetization.
Why did the world economy go so far?
In modern times, after the magic box was opened, the devil and the angels, the group of devils danced, the black swan, the gray rhinoceros and the gray horse took turns.
Humanity has created a series of economic systems in which risks and incentives coexist—limited liability, stock trading, real estate securitization, credit monetary systems, etc. These systems motivate people to pursue wealth and create crises.
This may be the welfare and cost of human pursuit of freedom and rights.
How can I demon and demon, and glow the angel light?
This article takes real estate as the main line and looks at the economic law from the perspective of economic system: the law of economic financialization, the law of economic system, and the law of economic liberalization.
This article logic:
First, real estate securitization: the road to real estate upper position
Second, asset monetization: the road of currency wraps
Three, economic leverage: the only way for mankind
1 Real Estate Securitization: The Road to Real Estate
Since the financial panic of 1837, US real estate prices have gone up, down, and down, but the financial crisis of 1929 changed this cyclical law.
This financial crisis triggered an unprecedented Great Depression. US housing prices fell rapidly. By 1934, the US house price index fell to 75.95 points, a drop of 24.05%. Since then, real estate has continued its downturn until 1944, ten years later, before returning to the high point before the big crisis [1].
During the Great Depression, Keynes’s state interventionism gradually became a mainstream trend of thought, and the US federal government has formulated a series of policies to try to recover the real estate market with a visible hand.
In 1932, Congress passed the Housing Loan Banking Act. According to this decree, the federal government established a federal housing loan bank. The state-owned bank, which specializes in housing loans, can obtain funds directly from the Ministry of Finance and provide loans to non-bank institutions.
Two years later, Congress passed the National Housing Act. According to this decree, the federal government established the Federal Housing Administration. The main task of this institution is to provide mortgage insurance for low-income people, especially individuals and families who can only afford low down payment ratios, in order to stabilize the mortgage market.
The Federal Housing Administration actually supports low-income people to buy houses by overdrafting national credit to increase the purchasing power of the market and curb the falling real estate prices. This move has increased the leverage ratio of the real estate market, directly promoting the emergence of low down payment ratios and installment payments, paving the way for real estate securitization.
Although the Federal Housing Administration provides mortgage guarantees, commercial banks are still afraid of risk and are reluctant to lend to low-income people.
In 1938, the federal government established the Federal National Mortgage Association. Initially, this was a government agency whose main task was to purchase mortgages secured by the Federal Housing Administration to stimulate banks to lend to low-income people and increase market liquidity. The move is equivalent to creating a new type of financial market – the mortgage market.
On the eve of the end of World War II, Congress passed the Veterans’ Rights Act. According to the bill, the Veterans Administration was established with the main task of solving the housing and welfare problems of military personnel.
After the Second World War, the Federal National Mortgage Association was basically managed by veterans who, through the guarantee of the Veterans Administration, magnified the leverage of veterans’ housing loans to ten times, and veterans only had to pay a down payment of 10%. Get a loan.
In the late 1960s, US real estate began to embark on the road to securitization.
In 1968, the government agency was privatized and became a private company, the famous Fannie Mae. After privatization, the company still has implicit guarantees from the federal government and became the largest “federal government sponsored company” in the United States.
After two years, the Federal Mortgage Corporation Freddie Mac was established. Congress authorizes two rooms (Family, Freddie Mac) can purchase ordinary mortgages, that is, can be purchased without the Federal Housing Administration guarantee Mortgage. The move stimulated large-scale lending by loan issuers and quickly promoted real estate securitization.
After the privatization of the Federal National Mortgage Association, a government agency, the National Mortgage Association, is known as Geely. Geely is part of the US Department of Housing and Urban-Rural Development and its main task is to provide guarantees.
Gelimei provides guarantees to lenders, and they promise investors that once the contract is breached, the US government is responsible for repaying the principal and interest. In this way, commercial banks and mortgage banks provide loans to lenders and pay a guarantee fee to Geely.
Since the 1980s, the scale of loans guaranteed by Geely has risen rapidly. In the second quarter of 1980, it broke through 100 billion US dollars. Ten years later, it broke through the trillion mark in the fourth quarter of 1990 and reached 5.38 trillion US dollars in the fourth quarter of 2008.
In the same period as Geely, the US Real Estate Investment Trust was also established.
The mission of this fund is to help housing companies finance. Before 1968, the debt of the US Real Estate Trust was zero, and in the second quarter of 1969 it exceeded $1 billion.
The disintegration of the Bretton Woods system in 1971 is a key event. After that, the world began to enter the era of floating exchange rates and credit currencies. The floating exchange rate stimulated foreign exchange arbitrage, activated the investment banking market, and rapidly expanded financial markets such as bonds, securities, trusts, futures, and insurance.
The debt of the Real Estate Trust Fund in the first quarter of 1973 exceeded $10 billion. From 1975 to 1984, the impact of the stagflation crisis, this data has been maintained for about 5 billion US dollars for a long time.
Since the second quarter of 1985, with the economic recovery and financial market boom, the debt of the Real Estate Trust Fund has grown rapidly. By the second quarter of 1997, this scale exceeded $100 billion; by the end of 2014, it had exceeded $1 trillion.
This way, the United States has formed a suite.Standard Routine for Real Estate Securitization: First, government credit guarantees are provided by the Federal Housing Administration and Geely; then, commercial banks and mortgage banks provide mortgages to buyers. (mortgage); Finally, Fannie Mae and Freddie acquired the mortgage on the bank’s hands and then packaged it into a standardized financial product offering security (MBS), sold to investment banks such as Lehman Brothers.
In this chain, the government is equivalent to the role of implicit guarantees due to the existence of the Federal Housing Administration, Geely and the “two rooms”. With the government’s implicit guarantees, commercial banks, Fannie Mae and Lehman Brothers, Bear Stearns and other investment banks will greatly reduce the risk control and ignore financial risks.
In 1968, the United States gave birth to the first mortgage-backed securities. In the first quarter of 1970, US mortgage securitisation was $46 billion. With the rise of investment banks in the 1970s, MBS accelerated rapidly. In the third quarter of 1974, this data exceeded 100 billion, and in the second quarter of 1988, it broke through trillions. Prior to the financial crisis in 2008, the agency’s MBS debt reached nearly $8 trillion. Among them, the total amount of MBS bonds in the two-room mortgage is as high as 4 trillion US dollars.
In the beginning, most of the MBS was issued by two houses and institutions. The assets were relatively high quality and the risks were relatively small. Since the 1980s, non-institutional MBS has sprung up, and non-institutional MBS includes subprime mortgage-backed securities (CMO).
CMO is a tiered security that cuts mortgage securities into multiple types of notes, representing different responsibilities and benefits, trying to meet the needs of investors with different risk preferences.
In addition to CMO, it also has financial derivatives such as CDO and CDS. Among them, CDS is a credit default swap contract, when Lehman Brothers, Bear Stearns, and American International Group ate a large-scale CDS and finally formed a crisis.
We look back. From real estate to real estate loans, to real estate securitization, to various financial derivatives, the US’s huge financial tower is built on top of real estate.
Bersheden, Lehman Brothers, Merrill Lynch and other investment banks and both houses regard the mortgage loan issued by commercial banks as the “raw material” of financial derivatives. Through a layer of cutting and packaging, securitization, a series of complex financial derivatives. These complex financial products were the driving force behind the US economic boom, and the financial sector created more than 40% of the profits at the time.
After real estate securitization, house price volatility will increase substantially, which will greatly increase real estate prices. why?
Real estate without securitization, the main value is residence. However, after securitization, real estate was given financial attributes, adding a very important value – the collateral of financial assets.
As a collateral for financial assets, the liquidity of real estate has increased significantly. Liquidity can increase asset prices, such as a house that can be transferred more expensive than an unflowable house. Why does liquidity increase asset prices?
In fact, this is a concept similar to the exchange value of money. The liquidity of real estate securities, equivalent to stocks and currencies, has a strong payment function, is easy to cash out and exchange various investment products and commodities, and is itself a liquid investment.
Friedman wrote a similar case in the book “The Scourge of Money” [2]. Friedman said that after the Second World War, the old German mark collapsed. He went to Germany as a consultant and used American cigarettes as a currency to fuel the car. Friedman found that the price of American cigarettes in Germany has risen a lot, because the US cigarettes have becomeA temporary currency has been given exchange value, and the demand has increased greatly.
It can be seen that any liquid assets are given the exchange value of similar currencies, and their prices will be raised. After the real estate was restructured, its price rose rapidly. However, liquidity is a double-edged sword, and the price of securitized assets fluctuates greatly and risks are high.
Many fund managers on Wall Street believe that financial derivatives and hedging mechanisms can effectively spread risk. When Greenspan served as the chairman of the Federal Reserve, he strongly supported the credit default swap contract, which was considered an important financial innovation, which dispersed the US credit risk and increased the risk resistance of the entire financial system.
As Andrew Ross Sorkin wrote in his famous “Big But Not Down”: “This is a story about adventurers: they dare to take all risks and are already at great risk, but I stubbornly believe that I have not taken any risks.”
In fact, this structure is an inverted pyramid structure. From real estate to financial derivatives, each time you add a layer, the leverage is magnified to varying degrees, and the risk increases. Once the underlying “raw material” went wrong, the entire pyramid would have collapsed. This is the fragility of the financial system.
Those subprime borrowers, who have extremely high leverage and poor risk tolerance, are most likely to default on defaults once interest rates rise or spillover risks occur. As the Fed raised interest rates, large-scale stimulus loans defaulted, triggering a subprime crisis. The subprime mortgage crisis eroded the base of the financial building, and the upper-level financial derivatives collapsed. The investment banks such as Bear Stearns and Lehman Brothers were in crisis.
It can be seen that real estate is the cornerstone of the entire financial building and the “raw material” for the continuous increase in leverage and demand for financial assets. The world’s major financial cities are striving to maintain high prices and high valuations of real estate to make financial assets.
2 Asset Monetization: The Road to Currency
After the outbreak of the subprime mortgage crisis in 2007, Fannie Mae and Freddie Mac fell into tens of billions of dollars in losses and were on the verge of bankruptcy.
In September 2008, US Treasury Secretary Henry Paulson took over the two houses. The specific plan is that the Ministry of Finance will invest in Freddie Mac and Fannie Mae and acquire relevant preference shares; the relevant government regulatory agencies will take over the day-to-day operations of the organization and appoint new leaders.
Paulson’s rescue operation has encountered a flood of criticism. However, insuranceErsen believes that the problem of Freddie Mac is facing systemic risks in the financial market. Taking over this institution is currently the “best means” to protect the market and taxpayers.
Why does the US federal government rescue two rooms?
One is the federal government’s implicit guarantee.
Although the two houses are private companies, they have been subject to special government care, including federal and state tax breaks, and long-term multi-billion dollar credit support from the US Treasury.
From the history of US real estate securitization, the government has played a hidden guarantee role. From the Federal Housing Administration, the Federal National Mortgage Association, the Veterans Administration, the US Real Estate Investment Trust, to Geely, the two houses, the federal government, they are guarantors and promoters of the US real estate securitization.
It is under the government’s implicit guarantee that investment banks are so unscrupulously using these “raw materials” to make large-scale financial derivatives. The market generally believes that the two houses sponsored by the federal government have a certain rigid redemption nature.
The outbreak of the subprime mortgage crisis shows that the United States overdrafts national credit in the process of real estate securitization. If the federal government does not go to the bottom, it will threaten the national credit of the United States, at least the credit of the federal government.
Second, housing mortgages have become the cornerstone of the US Financial Tower.
Before the crisis, the total amount of mortgage loans held or guaranteed by the two houses exceeded $5 trillion, accounting for nearly half of the total US home mortgage loans. If the two houses go bankrupt, the entire mortgage market and financial market will collapse.
During the subprime mortgage crisis, US real estate value evaporated by $5.5 trillion, triggering a debt spiral effect:
Recession of real estate assets means that overall financial assets have shrunk significantly(multiplier effect); asset shrinkage has led banks to lower credit lines and lower markets Liquidity, corporate borrowing costs rise; companies then sell assets to return funds, but asset selling has caused asset prices to fall, leading to further reductions in bank credit lines… so vicious circle (Fisher’s debt deflation theory, “Prosperity and Depression”) . Bear Stearns, Lehman, two houses, American International Group and other giants were involved.
Here, we can think that real estate securitization eventually kidnapped the entire financial system. When the two houses and the investment bank that operated the mortgage securitization assets were in crisis, the US federal government had to choose to help. This actually triggers the moral hazard of “big but not down”.
In fact, the real danger is not real estate securitization, but real estate monetization.
After the crisis broke out, compared to the Federal Ministry of Finance, the Fed’s rescue operation was a typical “helicopter money”. Since December 2008, the Fed has implemented a total of four quantitative easing.
Among them, in the first quantitative easing, the Fed used $500 billion to buy two-room mortgage-backed securities. After March, the Fed used up to $1.25 trillion to buy two-bedroom and Geely-american mortgage-backed securities. The Fed’s move is called “garbage recycling action” and directly pays for the toxic assets of the two houses.
In order to avoid the credibility of the federal government in the implementation of the rescue process, the Fed purchases government bonds on a large scale in the second, third and fourth quantitative easing. Among them, QE2’s national debt procurement scale is 600 billion US dollars, QE3 monthly 40 billion US dollars, QE4 monthly 4.5 billion US dollars.
In addition, the Fed also urgently provided $30 billion in loans to support JPMorgan Chase to acquire Bear Stearns. In the AIG rescue operation, the Fed provided more than $180 billion in loan assistance, accounting for 10% of all aid loans.
This rescue operation is the most in-depth involvement of the Fed in the history of the economy, covering real estate, investment banks, commercial banks, the debt market, and the real economy.
However, the Fed’s “helicopter money” approach directly pushed finance from asset securitization to asset monetization.
The financialization of assets generally has three forms: capitalization, securitization, and monetization.
Figure: Financialization – Capitalization, Securitization, Monetization, Source: Zhibenshe.
Capitalization is the basic stage of asset financialization. It belongs to non-standard products. For example, if you take the property to mortgage and get a loan, this is capitalization. Each person’s collateral is different, and the amount, duration, and interest of the mortgage are different. The biggest benefit of capitalization is the activation of assets and the flow of assets into capital.
Securitization is an intermediate stage of asset financialization. It belongs to standard products. For example, the company’s listing and issuance of stocks is the securitization of the company’s assets; the company’s issuance of bonds is the securitization of the company’s mortgage assets; the dealers issue futures, which are commodities. Securitization. Investment banks packaged mortgages into derivatives, and mortgages rose from capitalization to securitization.
Securitized asset forms are more advanced than capitalization. It is a standardized product that implements standardized contracts and can achieve centralized bidding, continuous bidding, electronic matching, anonymous trading and hedging transactions on the exchange.
The liquidity of asset securitization is far greater than capitalization, with greater asset risk and higher leverage. Currently, most of the products in the financial market are securitized assets such as futures, bonds, equities and financial derivatives.
Monetization is an advanced stage of asset finance and a standardized virtual product. Since the 1960s, economists have begun to pay attention to the trend of economic monetization, but there is no unified definition of monetization.
In a broad sense, money as an exchange medium constantly penetrates into various economic fields and links, and can be expressed by the ratio of M1 or M2 to GDP. Specifically, assets are monetized rather than securitized.
The difference between securitization and monetization, the simplest understanding is rigid redemption and asset collateral.
Securitization has asset collateral. For example, the company’s assets corresponding to stocks, futures correspond to bulk commodities; it is rigid redemption. For example, even if the company withdraws from the market, the shareholders are still shareholders of the company and enjoy corresponding rights.
Monetization is not rigidly paid and there is no asset collateral. For example, digital currency belongs to a typical asset monetization. Virtual assets such as Bitcoin and Ethereum do not have any asset collateral, nor can they rigidly redeem any assets, and can only be realized through transactions in the market. Although Facebook’s Libra Coin has collateral such as US dollars, Euros, etc., it is not rigidly redeemed.Production monetization.
The gold standard currency is actually the securitization of gold, and people can redeem the currency rigidity into gold. Credit currency is the monetization of national credit, and it is impossible to rigidly redeem reserve assets such as gold and national debt.
But the above is only a relatively strict definition. In fact, credit currencies that cannot be rigidly exchanged, digital currencies that are not collateralized by assets, treasury bonds that are not collateralized by taxes or assets, and securities that are insolvent and rely on overdraft state credits are all asset monetization.
Since the disintegration of the Bretton Woods system, the world entered the era of credit money, and the economy was monetized. After the outbreak of the financial crisis in 2008, after four rounds of quantitative easing by the Federal Reserve, the economic monetization expanded on a large scale.
The Fed’s balance sheet is an important perspective on economic monetization.
Figure: Changes in the Fed’s balance sheet, source: Zhibenshe.
Before the financial crisis broke out in 2007, the Fed’s balance sheet was less than a quarter of its current size, and it’s almost all US Treasury bonds. At the end of 2008, the Fed began to expand its table, and four rounds of quantitative easing bought large amounts of public debt and mortgage-backed bonds (MBS), and the balance sheet expanded rapidly. More than four times.
Most of the assets that the Fed’s expansion plans to buy are mortgage-backed bonds in two houses and government bonds issued by the federal government. At present, US public debt accounts for 55% of the Fed’s balance sheet, and mortgage-backed bonds are about 40%. The total of the two is as high as 95%, and the rest of the assets are diverse, including gold.
It can be seen that more than half of the assets in one dollar are government bonds from overdraft countries, and nearly half are from treasury bonds.
Why do the Fed’s purchase of government bonds and mortgage-backed bonds belong to asset monetization? And the previous national debt is not the asset monetization?
Why did the Fed buy strong mortgage support bonds at the time? It was because after the crisis broke out, the two houses were on the verge of bankruptcy, and the mortgage-backed bonds appeared to be redeemed.
In other words, these mortgage-backed debts have become toxic assets and their collateral value has been greatly reduced. The Fed bought these assets in large quantities to maintain its prices. In fact, it is in the middle of toxic assets and supports insolvent securities by overdrafting US dollar credit. This is a vicious, high-risk economic monetization.
Why does the Fed buy a lot of government bonds? The same is true. The Federal Ministry of Finance has to pay large sums of money for aid operations and has to issue large-scale government bonds. In order to prevent the price of government bonds from falling and support the financing of the Ministry of Finance, the Fed purchased large amounts of government bonds in the last three rounds of quantitative easing.
If the Fed does not buy, the price of Treasury bonds will fall, which means that US national credit is invested. From the perspective of bond portfolios, in early 2013, the Fed extended the maturity of bond portfolios to lower long-term bond yields and boost the housing market. As a result, the proportion of short-term bonds in 5-10 years rushed to 52%.
The Fed’s move is actually to cover the national debt that is not collateralized by any taxes or assets, and the US dollar credit is the bottom of the US national credit. This is also a vicious, high-risk economic monetization.
Figure: Currency, House Price and Credit Index, Source:【1】.
To sum up, the Fed’s economic monetization operation this time is to issue US dollars directly to replace government bonds and real estate mortgage-backed bonds. This is a two-way process: the bondage and leverage of dollar assets, the monetization and bubble of financial assets. The dollar and the bond seem to be the left hand and the right hand. You have the relationship between me and me. They are mutually dependent and interdependent. Therefore, modern monetary theory believes that bonds are equivalent to money.
After taking office, Powell realized the risks of economic monetization and accelerated the pace and intensity of contraction. In the process of shrinking the table, Powell said that he hopes to see the ratio of the overall balance sheet to the size of the US economy shrink further, and hopes to restore the balance sheet structure based on national debt.
In quantitative easing, the Fed’s balance sheet is equivalent to about 25% of the US economic annual output during the peak period, while the pre-crisis ratio is around 6%. This is enough to see how strong the US economy has been monetized in the past decade.
In early 2019, the Fed reduced its balance sheet by more than $400 billion, and the total size was reduced to more than $4 trillion, equivalent to about 20% of US GDP. This is probably the level of the Fed in January 2014. Powell hopes that this ratio will drop to around 17% and hopes to maintain this ratio for a long time.
However, there is still some distance from Powell’s expectations. The Fed ended the round in August this year and then dropped three times. In October, this time, considering the limited space for interest rate cuts, the Fed restarted quantitative easing and purchased $60 billion in short-term Treasury bills every month.
From December 2008 to the present, the Fed’s expansion is far greater than the contraction, the balance sheet has expanded several times, and the degree of economic monetization has never been greater.
The result of economic monetization is:
In terms of bonds, bond prices rose by 30% between 2007 and 2012; the size of US Treasury bonds began to expand on a large scale in 2009, and by October 31, 2019, it had exceeded 23 trillion US dollars.
In terms of stocks, the Dow Jones index rebounded from the bottom of March 2019, from the lowest of 6440 points to the current 28,000 points, up 21,560 points, and the US stock market experienced an epic ten-year big cow.
Figure: Dow Jones Index, Source: Zhibenshe.
In the property market, US real estate recovered around 2012 and has continued to rise since then, and now it has reached a fairly high level.
It can be seen that in the past decade, the rise in the price of US financial assets has become a monetary phenomenon. Real estate, bonds, and stocks are not real value, but the amount of money.
Because the US dollar is the world’s reserve currency, the economic monetization of the United States has led to the monetization of the global economy. The central banks of major world countries now have large amounts of US dollar assets in their balance sheets, which are issued in US dollars. China’s foreign exchange accounted for up to 40%. Central banks in these countries buy US debt in foreign exchange. Today, about 50% of US debt is held by foreign investors. The People’s Bank of China and the Bank of Japan are the two largest investors holding the most US debt.
This means that the global economy has become monetized with the US dollar and US debt.
From the perspective of financialization, the world economy has experienced such a process: real estate capitalization from the Great Depression(mortgage) , Asset Securitization (MBS and Financial Derivatives), which began in the 1970s, and US financial monetization after 2008 Span class=”text-remarks” label=”Remarks”> (money-backed bonds, stocks, real estate), and finally to the monetization of the global economy (US dollar, US dollar-backed global currency assets).
This is also a clue to real estate abduction of the world economy.
3 Economic leverage: the path that humans must follow
Excessive attention to economic causality makes it easy to ignore the objectivity of the law.
If during the Great Depression, Congress did not pass the Housing Loan Banking Act and the National Housing Act, did not set up a federal housing loan bank, and did not set up the Federal Housing Administration, can it prevent the capitalization of real estate?
If the federal government does not set up the Federal National Mortgage Association and does not acquire mortgage loans, will this new financial market for mortgage transactions not be born?
If Fannie Mae is not privatized, will Congress not expand its authority to acquire ordinary mortgage securities, will it not stimulate the expansion of the mortgage bond market?
If the Bretton Woods system does not disintegrate, the Graeme-Rich-Billiley Act is not abolished, prohibiting financial mixed operations and foreign exchange speculation, whether US investment banks will rise, real estate securitization and its finance Derivatives will not be flooded?
If after the financial crisis, the Fed does not choose to expand the table on a large scale, buy huge government bonds and mortgage-backed bonds in two houses, then the monetization of financial assets and the monetization of the global economy will not happen?
From a historical perspective, the Housing Loan Banking Act, the National Housing Act, the Federal National Mortgage Association, the establishment of two houses, the dissolution of the Bretton Woods system, and the introduction of the Financial Services Modernization Act (financial mixed industry), MBS, financial derivatives, etc. are all risk-based and leverage-increasing systems.
From the results, the 2008 financial crisis was a disaster that was plagued by real estate securitization. Today, the global economic debt problem is a continuation of this disaster, which is the result of the rise of real estate securitization to the monetization of financial assets.
One highly leveraged, high-risk system eventually led to economic disasters.
After seeing the financial crisis again, many people lack confidence in the road to marketization. The market means risk; the government seems to be safer.
However, good wishes are always unable to deliver us to the other side, and often backfire. Hayek warned the world: “The road to hell is usually paved by people’s good intentions.”
The history of the rise of the modern human economy is a combination of highly leveraged, high-risk market systems [3].
The market system itself is a risk system (due to transaction fees). While these systems release risks to the market, they are accompanied by great incentives.
From a limited liability company system, a stock trading system, an agent system, to national debt, futures, trusts, insurance, foreign exchange, financial derivatives, and credit money systems, all are highly leveraged and high-risk systems. It is these systems that constantly stimulate the desires and ambitions of entrepreneurs and speculators to continually cross the ocean and risk competition.
For example, the mortgage system has greatly increased the scale of real estate sales, allowing many people to buy a house, but this is a system of leverage and risk nature. Another example is that if the down payment ratio of housing loans is lowered, the real estate market can still have a wave, but the market risk may be very large.
Take the limited liability company as an example.
In 1602, a Dutch politician named John Alden Barnefelt actively brokered and established the first joint-stock company in history, the Dutch East India Company.
Unlike the British East India Company, which was established a year ago, the Dutch East India Company adopted a new type of corporate system – they gathered about 6.5 million Dutch guilder capital and established the first joint-stock company in history.
According to the share agreement, new investors and original investors must join or withdraw after 10 years of “general liquidation”. This rule means that the first dividend is after ten years, and ocean trade is a very high-risk investment. Some investors want to find ways and tell stories in order to avoid risks, and try to raise the stock price resale. To pass the risk, arbitrage withdrawal. With the accumulation of stocks, Amsterdam has gradually formed the world’s first stock exchange.
The joint-stock system and the stock trading system also create a market risk – limited liability.
Before this, European companies and Chinese firms, their investors and operators were integrated, and they operated with family wealth, spiritual personality and debt inheritance as guarantees. Today, investors only bear “limited liability” and can withdraw at any time.
In other words, “debt can not be returned”, “can also open at any time”, which undoubtedly greatly stimulated the market’s adventurous spirit, encouraging investors, speculators and sailors to cross the ocean and profit.
In 1892, Germany enacted the first “Limited Liability Company Law” in the history of the world.Confirmed “limited liability.” Since then, most countries have established the limited liability company law.
The economic system of limited liability system, stock trading system and agent system is a double-edged sword. It is both an incentive system and a risk system.
In fact, with the evolution of highly leveraged and high-risk systems, the economic crisis has also shown different characteristics.
The first phase is based on the excess crisis.
Since 1788, the first overcapacity crisis broke out in Britain. Until 1825, there were seven economic crises in the UK. Almost all of them were surplus economic crises. The severity and spread of the crisis was greater than once. Among the reasons, apart from the technical impact of the first industrial revolution, there is also the entrepreneurial adventure under the “limited liability” system.
The founder of the Freiburg School, Walter Eugen, severely criticized “limited liability” in his “order liberalism”, arguing that “limited liability” encourages entrepreneurs to take excessive risks and make wrong decisions.
The application of the limited liability system to the financial system will bring greater risks. The first is a joint-stock bank. The joint-stock bank is an operating mechanism with extremely low net assets. It is mainly engaged in asset allocation in interpersonal, time and space. However, because the net assets are too low, once the market fluctuates, it is easy to trigger a run and cause the bank to go bankrupt.
The second phase is based on the financial crisis.
The limited liability system plus the banking, stock, and bond systems is more complicated, and the economic crisis has shifted from the excess crisis to the financial crisis.
In the early nineteenth century, in the face of the overcapacity crisis that frequently exploded, the Bank of England’s business gradually turned to the public debt market, significantly reducing domestic private loans. From 1821 to 1825, the British gambled on the American market, and the London Stock Exchange issued a total of 48.97 million pounds of public debt to European and Central and South American countries.
In the second half of 1825, supply was seriously greater than demand, textiles began to fall, the investment bubble in Central and South America collapsed, more than 3,000 companies closed down, and textile machinery prices fell 80%. The crisis spilled over into the financial system, stock prices plummeted, and nearly 100 banks went bankrupt. At the end of 1825, the Bank of England’s gold reserves fell from £10.7 million at the end of 1824 to £1.2 million.
From 1837 to 1929, there were 10 economic crises in the past 100 years, with an average of about 10 years. And every economic crisis is caused byThe financial market is triggered by speculation in stocks and bonds, especially railway stock speculation.
The third stage is based on debt crisis and currency crisis.
In the 1970s, the floating exchange rate system, the credit currency system, the financial mixed system, and financial supervision were relaxed, and financial crises occurred frequently, especially the debt crisis and the currency crisis. Such as the 1982 Latin American debt crisis, the 1990 Japan bubble crisis, the 1994 Agave crisis, the 1997 Asian financial crisis, the 2002 Argentina debt crisis, the 2007 subprime mortgage crisis, the 2008 financial crisis, the 2009 debt crisis, and more Debt and currency crisis in emerging countries.
As early as 1819, Meng Di pointed out in the book “New Principles of Political Economy” that “the various disasters people suffer are the inevitable result of the bad social system.”
In order to harness these high-risk, highly leveraged economic systems, we have also created a number of safeguards.
For example, after the birth of the limited liability system and the stock trading system, fraud, running, insider manipulation and Ponzi schemes emerged endlessly. After hundreds of years of improvement, European and American countries have now formed a comprehensive corporate law, securities trading law, information disclosure system and a series of financial key bills, which are safeguard systems to reduce risks.
As another example, the bankruptcy law is actually a law that matches the limited liability system. However, this law requires a combination of institutional and law enforcement capabilities. If the supporting system cannot keep up, it is easy to fall into a dilemma. If the company is not bankrupt, the incentives of the limited liability system cannot be fully activated; if the company is bankrupted, it will create more serious risks.
As another example, the trust organization. At the end of the 19th century, trust organizations emerged, all tied to the stock company system, stock trading system, trust system, and bond trading system. At that time, because of the control of banks, credit and financial systems, and the control of strong financial capital, the stocks were more speculative and caused a financial crisis.
In 1890, Congress passed the Sherman Antitrust Act to sanction trust organizations. This law was launched on a large scale by Old Roosevelt and became the “economic constitution.”
Look again, the credit currency system and the financial mixed system. The collapse of the Bretton Woods system in 1971 triggered the “Nixon shock” and the world exchange rate was turbulent. Many economists and bankers, including Mundell, wanted to return to the gold standard and the fixed exchange rate era because the risks of credit currency and floating exchange rate were too great.
However, the pace of humanity entering the era of credit money is irreversible. The credit monetary system broke the rigid redemption and fixed exchange rate, and the financial risks increased greatly. The emergence of the financial mixed system also fueled the fire. After the outbreak of the financial crisis in 2008, we have been rethinking: in the face of a world kidnapped by real estate and asset monetization, we also need to improve various systems.
For example, fiscal hard constraints prevent the central bank from becoming a “cash machine”, such as the German government, which stipulates the central bank’s quota for purchasing government bonds; more clearly defines the central bank’s monetary policy objectives, establishes a wall for monetary and other macroeconomic goals, and prohibits currency. The policy does not serve bonds, stock monetization; strengthen supervision of financial giants, break the dual structure of the money market, combat capital trafficking, and so on.
From the capitalization of assets, to securitization, to monetization, incentives are getting bigger and bigger, risks are getting bigger and bigger, and a more complete guarantee system is needed.
It is worth noting that although economic monetization is risky, it is not entirely useless. Economists such as Friedman, Goldsmith, and Schwarz have reached an conclusion through analysis: The difference in economic monetization ratio basically reflects the level of economic development of different countries, the monetization ratio and one The degree of economic development of the country shows a clear positive correlation.
Monetization is an advanced stage of financialization, and economic monetization needs to cooperate with a more complete system and a higher level of law enforcement.
Therefore, the rise of human modern economy and the growth of wealth are the result of a combination of incentives, risks and security systems. This is a perspective to understand the economic crisis from the perspective of economic institutions.
However, a supportive system can also induce new risks. For example, the central bank’s “final lender” system and deposit insurance system reduce the risk of bank runs, but exacerbate the moral hazard of financiers. Just as car seat belts bring more safety to drivers, it brings more risks to pedestrians.
However, the world is so, the game can progress, and uncertainty is the normal state of progress. Only death is certain. Humans have been walking on the blade of rapid economic growth. If the system is misaligned, it may break out of crisis and fall into the abyss. In addition to the temptation of the road ahead and the crisis, we have no choice. If these risk systems are abandoned, mankind will return to the pre-17th century, an era of extremely low productivity and almost zero growth for thousands of years.
Fundamentally speaking, the way humans choose high-risk systems is in line with the evolution of modern society—the liberation of rights and freedoms.
From the perspective of rights, the rights of modern human society generally show three trends: differentiation, dimensionality reduction, and mobility.
Figure: Trends in the evolution of modern human rights, source: Zhibenshe.
From the feudal society to the modern democratic society, it is a very important redistribution of the rights structure in the history of mankind: the differentiation of rights, such as political power, military power, judicial power, and coinage rights, are divided and independent; equity is reduced, and state power is decentralized. In the hands of Congress or voters, tax transfers allow more people to enjoy public welfare; equity liquidity, political power is no longer family hereditary, and candidates ) The body flows, and the people’s opinions, migration, and other powers are freely exercised.
The birth of a series of economic systems in modern times is fundamentally in line with the historical trend of human society.
Take the stock trading system as an example.
The stock market was born. After the “share reform”, the listed companies realized the differentiation, reduction and liquidity of their rights.
The first is the separation of ownership and management rights. The birth of the stock market diversified the equity market into a primary market and a secondary market. The investors in the secondary market belonged to investment-type shareholders, enjoying ownership and shareholder decision-making power, but no management rights.
The second is the reduction in ownership. It is not easy for a listed company to transfer the company’s ownership to ordinary shareholders. It is not easy to buy its shares before Google goes public. After the listing, the public can buy and sell freely.
The third is liquidity. It is difficult for companies before the listing to transfer shares. Common stockholders sell and buy shares in the stock market (not up to the levy line, UnlockedWarehouse) Free operation without the consent of any shareholders.
Diversification, dimension reduction and enhanced liquidity of rights and interests, and promote the distribution of rights and interests more rationally, so as to achieve the effect of improving incentives and construct an efficient game rules.
A series of high-risk and high-incentive economic systems coexisted in the modern era, which is the first part of the modern liberalization system; it conforms to the regular trend of liberalization, industrial division of labor, and equal rights and responsibilities, so that responsibility and contribution are made (performance), paying labor (smart), matching the corresponding powers And income. For example, the “shared shares with different rights” system further separates and reduces equity from ownership and voting rights, and gives more voting rights to entrepreneurs and professional managers.
But, as Hayek said, chasing freedom is risky. He said that it is freedom to take orders from law rather than others. Conversely, the risk of freedom requires legal protection. Similarly, economic systems contain risks of freedom and naturally require legal protection.
Therefore, the economic system invented by mankind itself is an institutional bubble that is unbalanced, with both incentives and risks coexisting, rationality and bubbles coexist, and freedom and danger coexist. At present, the economic monetization supported by credit currency and national debt has pushed the world into a long-term unbalanced rational bubble.
postscript
Do you want to nationalize real estate, and this will not happen?
In addition to the fact that a small number of countries such as Singapore can achieve nationalization of housing, most countries develop real estate markets more or less.
Real estate marketization + land nationalization system is also likely to lead to land financial dependence, and the government and the interests of large real estate developers are tied up to raise land prices and housing prices.
The worst system is not real estate marketization, but the nationalization of land in the United States + the monetization of real estate.
This system is equivalent to the monopoly of land and money supply. Land auctions result in a high concentration of land supply in the hands of large real estate developers, and large real estate developers monopolize the real estate supply.
The most important thing is that this system has led to the bundling of the interests of the federal government and large real estate developers, jointly raising land prices and housing prices to create giants.The amount of US federal land finance supports real estate speculation and big real estate developers.
After the federal government was still in debt and got rid of the land finances, President Jackson cut off the cash flow of real estate, triggering the famous financial panic in 1837.
So, the real estate is in the market and the housing is returned to the government. However, the government should use the tax transfer payment to solve the housing problem instead of monopolizing the land.
References:
[1] Real estate financed by finance, Shao Yu, Chen Dafei, Finance;
[2] The scourge of money, Friedman, The Commercial Press;
[3] A brief history of the 100-year economic crisis, Qinghe President, Zhiben Society